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Chapter 11: Q11-27Q (page 583)

Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under fullcost, Shumway Oil would have reported retained earnings of \(42 million and net income of \)4 million. Under successful effort, retained earnings were \(29 million, and net income was \)3 million. Explain the difference between full-costing and successful-efforts accounting.

Short Answer

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Answer

Using full-cost accounting, the cost of unsuccessful ventures, as well as those that are successful, is capitalized; while in successful efforts, accounting capitalizes only those costs related to successful projects.

Step by step solution

01

Meaning of Depletion

Loss of natural resources as a result of access to them on a regular basis is called depletion. A company uses it when any kind of registered asset is involved, such as oil, coal, or gravel deposits.

02

Explaining the difference between full-costing and successful-efforts accounting.

  1. All exploration costs associated with the search for oil and gas are capitalized in full-cost accounting, whereas all exploration costs associated with the discovery of oil and gas are capitalized in successful-effects accounting.
  2. When oil and gas are retrieved from wells, the capitalized cost is expensed in the future, but under successful-efforts accounting, all expenditures that do not result in the discovery of oil and gas are expensed in the period incurred.

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Most popular questions from this chapter

(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.

Equipment
2018
2018
Jan 1Balance 134,750June 30Cost of 23,000 equipment sold (purchased prior to 2018)
Aug. 10Purchases 32,000

12Freight on Equipment purchased 700

25Installation costs 2,700

Nov. 10Repairs 500

Instructions

  1. Prepare any correcting entries necessary.
  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2018 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2018, balance was purchased in 2016.

    a. Straight-line
    b. Sum-of-the-years’-digits.

Identify the factors that are relevant in determining the annual depreciation charge, and explain whether these factors are determined objectively or whether they are based on judgment.

(Depreciation Computations—SL, SYD, DDB) Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of \(469,000. The asset is expected to have a service life of 12 years and a salvage value of \)40,000.

Instructions

  1. Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
  2. Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method.
  3. Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)

(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015

Truck No. 1 purchased Jan. 1, 2012, cost

\(18,000

Truck No. 2 purchased July 1, 2012, cost

22,000

Truck No. 3 purchased Jan. 1, 2014, cost

30,000

Truck No. 4 purchased July 1, 2014, cost

24,000

Balance, Jan. 1, 2015

\)94,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of \(30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was \)40,000. Ichiro. paid the automobile dealer \(22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, \)22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for \(3,500 cash; entry debited Cash and credited Trucks, \)3,500.

July 1, 2017 A new truck (No. 6) was acquired for \(42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for \)700 cash. Ichiro received \(2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, \)3,200, and credits to Miscellaneous Income, \(700, and Trucks, \)2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, \(21,000; 2016, \)22,500; 2017, \(25,050; and 2018, \)30,400.

Instructions

  1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
  2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.

(Depreciation for Partial Periods—SL, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for \(90,000. The machine has an estimated salvage value of \)6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.

Instructions

(a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods.

  1. Straight-line method.
  2. Activity method.
  3. Sum-of-the-years’-digits method.
  4. Double-declining-balance method.

(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods.

  1. Straight-line method.
  2. Sum-of-the-years’-digits method.
  3. Double-declining-balance method
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